Tax Appeal 101
The New Jersey Constitution requires that all real property be assessed for taxation: (1) under general laws; (2) by uniform rules; and (3) under the same standard of value. This mandate of uniformity among properties was codified by the Legislature in N.J.S.A. 54:4-23, which requires every assessor to determine the full and fair value of each parcel of real property within their respectively municipality as of October 1st of the pretax year. Full and fair value has been defined as market value or the amount that a hypothetical buyer would pay a seller, both being in equal bargaining positions.
Knowing your property’s annual tax assessment is only one-half of the story. While municipalities are supposed value every parcel at full and fair value every year, often times, tax assessors are unable to keep up with dramatic declines in particular segments of the market. External factors, such as inflation, local employment statistics and depreciation, can cause values to fluctuate. In addition, the realities of physical deterioration and economic obsolescence further reduce the value of commercial improvements. In order to account for the market fluctuation that municipalities cannot adjust to, the New Jersey Division of Taxation conducts an annual statewide sales survey, which compares the values of all usable, arms-length sales to the assessed value of the corresponding properties in order to determine an average level of assessment for each municipality. The Division of Taxation publishes an annual ratio for each municipality that is meant to adjust the assessments in that municipality to reflect the market value of the assessed property.
This average ratio of assessed to true value, which is published in the Division’s Table of Equalized Valuation every year, allows the assessment of a property to remain the same while market values fluctuate. For instance, if the ratio for a particular municipality is fifty percent (50%) and the assessment of a property in that municipality is $100,000, then the implied fair market value, referred to as the Equalized Value, indicated by the assessment is $200,000 ($100,000 divided by 50%). While the Division of Taxation’s system can work in situations where real estate values trend gradually, it can obscure the value of properties in volatile markets. Thus, in rapidly declining markets, the Equalization Ratio is less reliable and may obscure the corresponding Equalized Value of your property. The annual Table of Equalized Valuation is broken down by county and is published on the Division of Taxation’s website, which can be viewed by logging on to www.nj.gov/treasury/taxation/lpt/lptvalue.shtml.
Take the example discussed earlier in previous paragraph; if the same municipality’s Equalization Ratio declines to forty percent (40%), then the Equalized Value for the same property increases to $250,000 ($100,000 divided by 40%). The lower the particular municipality’s Equalization Ratio drops, the higher the corresponding Equalized Value climbs. In situations where real estate values continue to decline or become erratic, filing a property tax appeal may be the only way to realign you property’s assessment with the market and minimize your property tax burden.
The Tax Appeal Process
N.J.S.A. 54:3-21 allows an aggrieved taxpayer to appeal the assessment of their property. The first step in the appeal process is to determine if the property tax assessment and corresponding Equalized Value is accurate. It is the taxpayer’s burden to prove that the property on appeal is over-assessed. The assessment set by the municipality is presumed to be correct and the taxpayer must overcome the presumption by clear and convincing evidence of fair market value.
Fair Market Value can be determined using one or a combination of the following three approaches to value: (i) The Market/Sales Comparison Approach; (ii) The Income Capitalization Approach; or (iii) The Cost Approach. The Market/Sales Comparison Approach is typically used to estimate the value ofresidential properties, while the Income Capitalization Approach is generally utilized when valuing income producing properties such as apartment buildings, office complexes and retail properties. Under the Cost Approach, improvements are valued by determining the current cost to construct the building(s) but allowing for the appropriate amount of depreciation based upon the age, condition and obsolescence of the improvement(s). The depreciated improvement value is combined with an estimated value for the land to reach a hypothetical fair market value. The Cost Approach is used to value new construction or special purpose properties, such as petroleum refineries and chemical plants, which are not frequently exchanged in the market. In most instances, when dealing with commercial or industrial properties, the use of an Appraiser is necessary. Using an Appraiser is also preferable when litigating the value of most Class 2 residential properties.
When an assessment is more than $1,000,000 the appeal may be filed directly with the Tax Court of New Jersey or the County Tax Board. If the assessed value of your property is below $1 million, the appeal must be filed with the County Tax Board where the property is located. In either case, the deadline to file an appeal is April 1st, except in municipalities where a revaluation occurred in which case the filing deadline is May 1st. Monmouth, Gloucester, and Burlington Counties are an exception to the April 1st filing deadline. The deadline to file an appeal in these three counties is January 15th.
Impediments to Pursuing Your Tax Appeal
There are two important procedural defects that every taxpayer must be cognizant of when filing a property tax appeal. The first is, of course, the filing deadline, which is a jurisdictional bar from proceeding with your appeal. The filing deadline for Monmouth, Gloucester, and Burlington County are all now January 15. All other counties are April 1st, unless you live in a revaluation town and then the filing deadline is May 15th, or 45 days after you receive your new assessment card (whichever comes later). The second procedural hurdle to overcome is the requirement that all property taxes and municipal charges be paid through the first quarter of the year on appeal. For taxpayers considering an appeal in 2021, all taxes and municipal charges for prior years and the first quarter of 2021 must be paid; the failure to do so can be a fatal defect to pursuing your appeal.
There are additional impediments, which owners of income-producing properties must consider before filing an appeal. Therefore, it is advisable to seek the counsel of a qualified attorney who is well-versed in the pitfalls associated with maintaining a property tax appeal. Most property tax attorneys will review your property information, free of charge, to determine if your property is over assessed.
Now more than ever, it is critical that property owners minimize overhead and reduce operating costs. Filing a tax appeal is the only measure you can take to rectifying an excessive or disproportionate property tax assessment. The potential tax savings derived from a tax appeal will directly affect your bottom line, which increases profitability and market demand.